TUPRS: Outperform Maintained

Recovery in cracks gains pace led by mid-distillates…

On the back of post-pandemic recovery in mobility, growth momentum  in global economic activity and supply constraints caused by Russia-Ukraine war, indicative refinery margins for Tupras showed solid signs of improvement in 1Q’22, especially in March. We calculate monthly refining margin of Tupras exceeds USD10/bbl level in March and its 1Q average was around USD7.0/bbl (excluding inventory effect), up from USD5.5/bbl (clean) refining margin in 4Q and USD-1.0/bbl negative margin in the first quarter of 2021. Given the increasing trend in crack margins and potential positive inventory effects, we see a high chance of an outlook upgrade from Tupras management, which previously guided to a refinery margin of USD4.0-5.0/bbl in FY’22.

… which reflect tight diesel supply and higher gas prices in Europe  

Looking at drivers of improvement in crack margins, we see that diesel price in Europe rose faster than crude oil because of uncertainties related to imports from Russia, which accounts for around 20% of EU’s total diesel imports. In addition to that, European refineries also buy VGO from Russia to produce diesel, which also means potentially reduced domestic supply for some EU countries. Note that Tupras product yield is highly tilted towards mid-distillates (around 55% of total); therefore this trend would lend a material support to earnings outlook of the company. Moreover, natural gas price remains elevated in Europe, which also lifts oil product prices on the back of gas-to-oil switches and cost pass-through of refineries. Turkey usually revises its industrial tariff for natural gas gradually, lagging behind spot market prices in Europe most of the time.

Estimates revised up, see 36% upside to new TP of TL308/share

Overall, we expect FY22 to be a strong year for Tupras as we estimate EBITDA CCS to rise from USD0.6bn to USD1.1bn, while reported EBITDA could be flattish at around USD1.4bn (note here that sharp FX-driven inventory gains inflated 2021 operating earnings). Thanks to solid cash flow and earnings, we also see room for resuming dividends in 2023E (possible payment from 2022 earnings). Our new DCF valuation points to 36% upside potential for Tupras as we raise our TP to TL308.20/share using a TL-based WACC of 23.9%.

Strategic transformation plan offers long-term roadmap & increases visibility… The company presented its long-term strategic investment plans back in Nov’2021, which addressed concerns about peak oil and CO2 emissions. With greater use of renewable electricity, conversion to SAF (Sustainable Aviation Fuel) and investments in green hydrogen projects, Tupras aims to cut carbon emissions 35% by 2035, while maintaining profitability (with 30% of EBITDA coming from green projects by 2035) and dividends (80% average payout projection).

Potential Risk

Slowdown in global demand, a new pandemic or new Covid variants, government intervention on domestic fuel pricing, tight crude oil differentials amid Russia sanctions could be counted among negative risk factors, while possible return of Iran to the international oil markets can be an important upside risk to the current outlook.



Y. F. Securities Research